U.S. manufacturing shrank to its weakest level in more than three years in November to a level that suggested contraction in the industry.
The Institute for Supply Management, a trade group of purchasing managers, said Monday that its index of manufacturing conditions fell to a reading of 49.5. That's down from 51.7 in October. Any reading below 50 signals contraction.
Most analysts had predicted the index would slip only a little, to 51.4. That was its lowest level since July 2009, the first month after the Great Recession ended.
Worries about automatic tax increases in the New Year cut demand for factory orders and manufacturing jobs.
A measure of new orders fell to 50.3 points, to its lowest level since August. However, production gained 1.3 points to reach 53.7.
Inventories dropped to 45.0 from 50.0 the month earlier, increasing the spread between new orders and inventories to 5.3 points from 4.2 in October.
"Today's report suggests that the manufacturing sector is likely to remain a weak point in the recovery for a few months yet," Jeremy Lawson, an economist at BNP Paribas, said in a note to clients.
Housing recovery to help
However, TD senior economist Martin Schwerdtfeger said the widening of the spread between new orders and inventories signals that production will have to increase to fill a future pick-up in orders.
Schwerdtfeger predicted the index will return above 50 "in the coming months," as the effects of superstorm Sandy dissipate and export demand from emerging markets offsets the drag from advanced economies.
"A firming housing recovery will also lend support for the sector going forward," he said.
U.S. businesses expressed concerns about the "fiscal cliff." That's the name for sharp tax increases and government spending cuts that will take effect in January if Congress and the Obama administration fail to strike a budget deal before then.
Worries about the fiscal cliff have led many companies to pull back this year on purchases of machinery and equipment, which signal investment plans.
The decline could slow economic growth and hold back hiring in the October-December quarter.
Companies "are just backing off and not making any moves until things clear up a bit," Bradley Holcomb, chairman of the ISM's survey committee, said.